Offset Mortgages

Practical Effect of an Offset Mortgage

In order to see just how or if you would benefit from an offset mortgage, it may be helpful to look at a practical example of how an offset mortgage works.

Consider a £100,000 mortgage that has a 20 year term at an interest rate of 5.75 percent. This mortgage on a standard repayment option would cost £479.17 a month, resulting in a total amount that would be paid back by the end of the 20 years of £215,199.

Now consider that the borrower has a savings pot of around £50,000. If this is used against the mortgage, the duration of the mortgage would drop by approximately 2 years, resulting in the total cost of the mortgage being £204,451 a saving of £10,748.

Alternatively, if the borrower continued to pay the mortgage over 20 years, they would then benefit from a lower monthly payment of £455.21, a monthly saving of £23.96. Overall, this means that the cost of the mortgage is reduced to £209,449 a saving of £5,750, whilst still allowing the borrower access to their savings as required.

Bear in mind that these calculations do not take into account the tax saving that the borrower would gain. If they maintained £50,000 in an interest paying savings account, then tax would be payable on the income at the income tax rate that the borrower is paying on other income, which could be as high as 40 percent. In almost all cases, the interest rate that a borrower pays in relation to the mortgage borrowing is likely to be higher than any interest rate that would be received from a savings account, particularly when the tax liability is taken into account.

Offset Mortgage Providers
Many high street lenders now offer an offset account of some description. Offset account lenders normally require that the entire income of the borrower is paid into the account. Offset mortgages provide lenders with an opportunity to cross sell other products, thus gaining a loyal customer for the future, not just for the duration of the mortgage.


Summary
By using an offset mortgage it is possible either to reduce the length of a mortgage term or to reduce the monthly payments made over the length of the mortgage;
in order to gain from the savings with an offset mortgage, it is usually necessary to hold substantial savings in the account on a regular basis;
• many high street banks and lenders offer offset mortgage products, but it normally requires the borrower to move their other financial products such as current accounts and credit cards to the same provider; therefore, you should consider the merits of the entire offering before selecting the best provider for your needs.